Question About Contributions To Swiss Retirement Account

[tb]

I saw the following question posted on a forum for Swiss citizens
living abroad:

***begin***
I was wondering, whether somebody might know if the contributions
employee and employer into pension scheme pillar 2 in Switzerland is
tax free resp. tax deductible in the US?
My complete income comes from an employer in Switzerland and is treated
as a Swiss salary....all the Swiss deductions.
***end***

These are the facts as I understand them:
This guy is an engineer living in New York City who is employed by a
company residing in Switzerland. Therefore the Swiss company deducts
retirement contributions from his salary and puts them into something
like a Swiss 401(k) (the "pension scheme Pillar 2" he refers in his
posting). So a % of the contributions to this "401(k)" comes out of
his salary and another % is contributed by the Swiss company.

As you can read, he wants to know whether such contributions can be
deducted somewhere in his U.S. income tax return.

What do the experts on this newsgroup think?
--
tb

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[ira smilovitz]

On Thursday, January 4, 2018 at 11:31:25 AM UTC-5, tb wrote:
> I saw the following question posted on a forum for Swiss citizens
> living abroad:
>
> ***begin***
> I was wondering, whether somebody might know if the contributions
> employee and employer into pension scheme pillar 2 in Switzerland is
> tax free resp. tax deductible in the US?
> My complete income comes from an employer in Switzerland and is treated
> as a Swiss salary....all the Swiss deductions.
> ***end***
>
> These are the facts as I understand them:
> This guy is an engineer living in New York City who is employed by a
> company residing in Switzerland. Therefore the Swiss company deducts
> retirement contributions from his salary and puts them into something
> like a Swiss 401(k) (the "pension scheme Pillar 2" he refers in his
> posting). So a % of the contributions to this "401(k)" comes out of
> his salary and another % is contributed by the Swiss company.
>
> As you can read, he wants to know whether such contributions can be
> deducted somewhere in his U.S. income tax return.
>
> What do the experts on this newsgroup think?
> --
> tb
>
> --

I'm not an expert on international taxation, but I do know there is a tax treaty between the US and Switzerland. The answer should be there.

Ira Smilovitz, EA

[tb]

On 1/3/2018 at 7:26:04 PM ira smilovitz wrote:

> On Thursday, January 4, 2018 at 11:31:25 AM UTC-5, tb wrote:
> > I saw the following question posted on a forum for Swiss citizens
> > living abroad:
> >

> > begin

> > I was wondering, whether somebody might know if the contributions
> > employee and employer into pension scheme pillar 2 in Switzerland is
> > tax free resp. tax deductible in the US?
> > My complete income comes from an employer in Switzerland and is
> > treated as a Swiss salary....all the Swiss deductions.

> > end

> >
> > These are the facts as I understand them:
> > This guy is an engineer living in New York City who is employed by a
> > company residing in Switzerland. Therefore the Swiss company
> > deducts retirement contributions from his salary and puts them into
> > something like a Swiss 401(k) (the "pension scheme Pillar 2" he
> > refers in his posting). So a % of the contributions to this
> > "401(k)" comes out of his salary and another % is contributed by
> > the Swiss company.
> >
> > As you can read, he wants to know whether such contributions can be
> > deducted somewhere in his U.S. income tax return.
> >
> > What do the experts on this newsgroup think?
> > --
> > tb
> >
> > --
>
> I'm not an expert on international taxation, but I do know there is a
> tax treaty between the US and Switzerland. The answer should be there.
>
> Ira Smilovitz, EA

I think that what this guy is asking is whether he can _reduce_ his
taxable income (for U.S. income tax purposes) by the amount taken out
of his paycheck and which goes into the Swiss "401(k)". This would be
the same principle applied to most of us who work in the U.S., are paid
by a U.S. company, and contribute pre-tax dollars to a U.S. 401(k),
thus reducing the taxable income.

But does this principle apply to somebody who contributes to a Swiss
"401(k)"?

I got ahold to the CONVENTION BETWEEN THE UNITED STATES OF AMERICA
AND THE SWISS CONFEDERATION FOR THE AVOIDANCE OF DOUBLE TAXATION WITH
RESPECT TO TAXES ON INCOME. But I'm having problems locating an
article that would apply to this situation...

--
tb

[John Levine]

In article <xn0l4k8b...@reader.albasani.net> you write:
>> > As you can read, he wants to know whether such contributions can be
>> > deducted somewhere in his U.S. income tax return.

Looking at the tax treaty, I see that Swiss social security is taxed
only in Switzerland, but nothing about pension contributions.

On the other hand, he can credit his Swiss tax against his US tax.
I'd think that'd be worth a lot more than a deduction, and as far as I
can tell he can credit all of his Swiss tax against all of his US tax.






--
Regards,
John Levine, jo...@iecc.com, Primary Perpetrator of "The Internet for Dummies",
Please consider the environment before reading this e-mail. https://jl.ly

[Alan]

On 1/4/18 8:27 AM, tb wrote:
> I saw the following question posted on a forum for Swiss citizens
> living abroad:
>
> ***begin***
> I was wondering, whether somebody might know if the contributions
> employee and employer into pension scheme pillar 2 in Switzerland is
> tax free resp. tax deductible in the US?
> My complete income comes from an employer in Switzerland and is treated
> as a Swiss salary....all the Swiss deductions.
> ***end***
>
> These are the facts as I understand them:
> This guy is an engineer living in New York City who is employed by a
> company residing in Switzerland. Therefore the Swiss company deducts
> retirement contributions from his salary and puts them into something
> like a Swiss 401(k) (the "pension scheme Pillar 2" he refers in his
> posting). So a % of the contributions to this "401(k)" comes out of
> his salary and another % is contributed by the Swiss company.
>
> As you can read, he wants to know whether such contributions can be
> deducted somewhere in his U.S. income tax return.
>
> What do the experts on this newsgroup think?
>

He can not take a deduction on his US return for his contributions to
the plan because the plan is not a US trust.

[tb]

On 1/4/2018 at 3:04:34 AM Alan wrote:

> On 1/4/18 8:27 AM, tb wrote:
> > I saw the following question posted on a forum for Swiss citizens
> > living abroad:
> >
> > ***begin***
> > I was wondering, whether somebody might know if the contributions
> > employee and employer into pension scheme pillar 2 in Switzerland is
> > tax free resp. tax deductible in the US?
> > My complete income comes from an employer in Switzerland and is
> > treated as a Swiss salary....all the Swiss deductions.
> > ***end***
> >
> > These are the facts as I understand them:
> > This guy is an engineer living in New York City who is employed by a
> > company residing in Switzerland. Therefore the Swiss company
> > deducts retirement contributions from his salary and puts them into
> > something like a Swiss 401(k) (the "pension scheme Pillar 2" he
> > refers in his posting). So a % of the contributions to this
> > "401(k)" comes out of his salary and another % is contributed by
> > the Swiss company.
> >
> > As you can read, he wants to know whether such contributions can be
> > deducted somewhere in his U.S. income tax return.
> >
> > What do the experts on this newsgroup think?
> >
> He can not take a deduction on his US return for his contributions to
> the plan because the plan is not a US trust.

That's what I thought... In order to take a deduction he would have to
ask the Swiss employer to offer a plan that is considered a US trust,
or he could set up his own IRA/Roth IRA and contribute to it. Am I
correct?

--
tb

[Alan]

I assume he is in New York under a work visa and receives a W-2 to
reflect his earnings. As such, he may open an IRA or a Roth IRA and
contribute up to the limits. See IRS PUB 590A for the limits. As he is
not an active participant in a US qualified plan, he could take a
deduction for his contribution to a Traditional IRA. There is no
deduction for contributions to Roth IRAs.

AS an aside, if the employer contribution to his foreign pension is
vested, then that contribution is treated as taxable US compensation and
should be included on his W-2. Additionally, he needs to find out how
Switzerland would treat his ownership of a US IRA. The treaty treats an
IRA just like a pension. Switzerland (S) taxes based on residency. I
conclude that if he returns to S and takes an IRA distribution, then he
would only be subject to S tax on that. I am not sure about the Roth
IRA. In the US, he would not be subject to tax if he was resident here.
He never paid S tax on the income he contributed nor did he pay S tax on
any income in the account. He may also be subject to cantonal capital
tax on the Roth IRA value. I am not an expert on Swiss income and
capital taxes.

[Roger Fitzsimmons]

On Thursday, January 4, 2018 at 11:31:25 AM UTC-5, tb wrote:

> I saw the following question posted on a forum for Swiss citizens
> living abroad:
>
> ***begin***
> I was wondering, whether somebody might know if the contributions
> employee and employer into pension scheme pillar 2 in Switzerland is
> tax free resp. tax deductible in the US?
> My complete income comes from an employer in Switzerland and is treated
> as a Swiss salary....all the Swiss deductions.
> ***end***
>
> These are the facts as I understand them:
> This guy is an engineer living in New York City who is employed by a
> company residing in Switzerland. Therefore the Swiss company deducts
> retirement contributions from his salary and puts them into something
> like a Swiss 401(k) (the "pension scheme Pillar 2" he refers in his
> posting). So a % of the contributions to this "401(k)" comes out of
> his salary and another % is contributed by the Swiss company.
>
> As you can read, he wants to know whether such contributions can be
> deducted somewhere in his U.S. income tax return.
>
> What do the experts on this newsgroup think?
> --
> tb

I can tell you that about 6 years ago I was married to a woman who worked in Canada. She contributed to an RSP, which is the Canadian equivalent of an IRA. It was the worst of both worlds. The contributions were not deductible for USA tax purposes, but they did reduce her Canadian taxes, which reduced the tax credit available for the USA.

[tb]

On 1/3/2018 at 6:27:03 PM tb wrote:

> I saw the following question posted on a forum for Swiss citizens
> living abroad:
>

> begin

> I was wondering, whether somebody might know if the contributions
> employee and employer into pension scheme pillar 2 in Switzerland is
> tax free resp. tax deductible in the US?
> My complete income comes from an employer in Switzerland and is
> treated as a Swiss salary....all the Swiss deductions.

> end

>
> These are the facts as I understand them:
> This guy is an engineer living in New York City who is employed by a
> company residing in Switzerland. Therefore the Swiss company deducts
> retirement contributions from his salary and puts them into something
> like a Swiss 401(k) (the "pension scheme Pillar 2" he refers in his
> posting). So a % of the contributions to this "401(k)" comes out of
> his salary and another % is contributed by the Swiss company.
>
> As you can read, he wants to know whether such contributions can be
> deducted somewhere in his U.S. income tax return.
>
> What do the experts on this newsgroup think?

On a forum for Swiss citizens living abroad, this lady posted a reply
affirming that contributions to a Swiss retirement account could be
deducted from a U.S. income tax return for the period of five years.
She makes reference to Article 28.4 (a) and (b) of the U.S./Swiss tax
treaty.

Article 28.4 (a) and (b) of the tax treaty states:
***begin***
ARTICLE 28
Miscellaneous

4. In determining the taxable income for purposes of taxation in a
Contracting State of an individual who renders personal services and
who is a resident, but not a national, of that State, contributions
paid by, or on behalf of, such individual to a pension or other
retirement
arrangement that is established and maintained and recognized for tax
purposes in the other Contracting State shall be treated in the same
way for tax purposes in the first-mentioned State as a contribution
paid to a pension or other retirement arrangement that is established
and
maintained and recognized for tax purposes in that first-mentioned
State, provided that:
a) the individual was not a resident of that State, and was
contributing to that pension or other retirement arrangement
immediately before he began to exercise employment in that State; and
b) the competent authority of that State agrees that the pension or
other retirement arrangement in the other Contracting State generally
corresponds to a pension or other retirement arrangement recognized for
tax purposes by that first-mentioned State.
The benefits of this paragraph shall extend for a period not exceeding
five taxable years beginning with the individual's first taxable year
during which the individual rendered personal services in the
first-mentioned Contracting State. For purposes of this paragraph, a
pension or other retirement arrangement is recognized for tax purposes
in a Contracting State if the contributions to, or earnings of, the
arrangement would qualify for tax relief in that State.
***end***

In reading such article --please keep in mind that I am no tax
expert!--, I think that she has a point if whoever is filing a U.S. tax
return is not a U.S. citizen.

What do the experts here think?

[Alan]

Yes, it would appear that 28.4 allows a deduction under certain conditions:
1. The plan in Switzerland must be comparable to a US plan such as any
defined contribution plan (401, 403, 457).
2. The deduction is only available during any of the first 5 years of
physical presence in the US. It is not 5 years of deductions.
3. The deduction is only available if he was contributing to the Swiss
plan before he came to the US.
4. The amount he can DEDUCT is limited by US law and not Swiss law. In
other words, if a comparable US plan limits his contributions to X% of
compensation and limits his deduction to a maximum of $Y, he must
conform to those rules and not Swiss rules that may have allowed for a
greater exclusion or deduction.

The question now becomes, where does he take this deduction. None of the
entries on the 1040 as adjustments fits the bill with the possible
exception of a write-in deduction on Line 36. The other place would be a
write-in exclusion (negative number) on Line 21 Other Income. I would
think that Line 36 would be proper as this is a deduction and not an
exclusion.

Either way, I believe that IRS Form 8833 Treaty-Based Return Position
Disclosure would need to be filed with the tax return.

[tb]

The lady on the Swiss expat forum just posted how it was handled for
her by:
*****begin*****
There is no line for this on form 1040. Your employer has to correct
the W-2 (Wage and Tax Statement) and deduct the plan contributions from
the gross pay. This means, your "wages, salaries, tips, etc." on line 7
will be lower.
That's how our tax lawyer filed for a refund and IRS accepted it. Next
year, our employer deducted the payments under "401(k) (D-Box 12)" -
whatever D-Box 12 is.
*****end*****


--
tb

[davidsanf...@gmail.com]

On Thursday, January 4, 2018 at 5:31:25 PM UTC+1, tb wrote:
> I saw the following question posted on a forum for Swiss citizens
> living abroad:
>
> ***begin***
> I was wondering, whether somebody might know if the contributions
> employee and employer into pension scheme pillar 2 in Switzerland is
> tax free resp. tax deductible in the US?
> My complete income comes from an employer in Switzerland and is treated
> as a Swiss salary....all the Swiss deductions.
> ***end***
>
> These are the facts as I understand them:
> This guy is an engineer living in New York City who is employed by a
> company residing in Switzerland. Therefore the Swiss company deducts
> retirement contributions from his salary and puts them into something
> like a Swiss 401(k) (the "pension scheme Pillar 2" he refers in his
> posting). So a % of the contributions to this "401(k)" comes out of
> his salary and another % is contributed by the Swiss company.
>
> As you can read, he wants to know whether such contributions can be
> deducted somewhere in his U.S. income tax return.
>
> What do the experts on this newsgroup think?
> --
> tb

Well known to every American in Swiss Land:

Swiss Pillar 2 (The Swiss 401k as you call it)is taxable as normal income both on the employee and employer contributions on the 1040. Pillar 2 is not a qualified plan.

Best to bite the bullet and be happy he can take it all when he leaves Switzerland.

Minimize the Pillar 2 contribution.

Stock up on IRA's and HSA's. It requires more savings but has the tax advantage. Of course this impacts medical plan choices.

Remember Swiss tax has to be filed first, then US tax for the tax credit. The Swiss will tax your income, your wealth, and your religion.

Not sure if the religion tax falls under a Foreign tax credit as I claim atheist.

My strong advice, do not try to do these taxes on your own.